Brightline test explained (2024)

The brightline test is a capital gains tax for properties bought and sold within a certain time frame (two years currently). It is levied at your top marginal tax rate:

Marginal tax rates from April 2025 onward:

• 0 - $15,600 - 10.5%
• $15,601 - $53,500 - 17.5%
• $53,501 - $78,100 - 30%
• $78,101 - $180,000 -33%
• $180,001 and over - 39%

For example, if you earned $100,000 from your salary plus $50,000 from selling a property your capital gain would be taxed at 33%. If you made $200,000 purely from buying and selling property within two years? it would be taxed progressively just like income from a salary would be. 

Previously capital gains were taxed purely on the basis of intentions - meaning if you bought a property intending to sell it for profit, your capital gain would be taxed. The problem with this rule was that it was impossible to prove what someone intended to do, so presumably lots of taxable capital gains went untaxed. 

So in 2015 the National Government brought in the brightline test to plug that hole and tax all capital gains for properties bought and sold within two years. Since then the brightline has changed several times:

• Properties bought before 2018 had no brightline test. 

• In 2015 the brightline test was introduced at two years. 

• In 2018 the brightline was extended to five years. 

• In 2021 the brightline was extended to 10 years (but new builds were kept at five). 
  

Before the National Government changed the brightline test, its time limit depended on when you bought your property. But now all properties are subject to the two year test. 

If a family member dies and leaves you property you generally won’t have to pay tax on any capital gains. 

If your property is transferred to someone else as part of a relationship property settlement it won’t be taxed under the brightline rule in most cases. 

Property developers and builders often get treated a little differently under the brightline rule because the IRD believes they’re more likely to buy and sell property for profit. If you’re a builder or developer there’s a good chance you’ll have to pay tax on any gains you make, even if you’re outside the brightline (another word here?. 

If you’ve rented out more than a 50% portion of your main home, or if you lived in your main home less than 50% of the time it will be subject to the brightline test. For example, let’s say you lived in your granny flat and rented most of your property out, any gains from a sale would be taxed. You’d also be taxed if you spent more than half your time travelling, living in your holiday house or living anywhere other than your main home. 

If you were to sell your property to a trust or company that you own or have shares in,that sale could still trigger the brightline rule if you had bought it less than two years prior (even though you’re essentially selling the property to yourself). Even if the sale didn’t trigger the brightline, the two year period would still reset - meaning if the trust or company could be taxed if it sold the property within two years. 

The good thing about the brightline tax is that 100% of your sale proceeds aren’t taxed. Instead you’ll be taxed on the net profit after expenses are deducted.

Expenses might include:

• The total purchase price. 

• Fees incurred when buying the property which might include legal fees or the cost of a buyer’s agent. 

• Any expenditure related to the sale of the property such as legal fees, real estate agent commission and marketing costs. 

• Holding costs such as interest after a sale and purchase agreement has been entered into (only if these have not already been claimed as deductions against rental income). 

If you deduct the total expenses from your total sale proceeds, the number that comes out is your profit (the bit that you’ll pay tax on). You’ll pay tax at your top marginal income tax rate, whatever that might be.